On 18 October 2004, Germany’s Federal Ministry of Finance issued the new Draft of Administrative Principles on Transfer Pricing Documentation and Procedures after a lengthy period of development.

In this article for Tax Management Transfer Pricing Report, NERA Special Consultant Dr. Alexander Voegele, with former NERA Consultants Dr. Markus Brem and Thomas Tucha, examine the economic impact of the new Administrative Principles on businesses that conduct cross-border business transactions and file tax returns in Germany. Their economic analysis looks at what is new in this version of the guidelines, what and when to document, when documentation is deemed insufficient, and the consequences of non-compliance.

They find that the new draft reflects remarkable changes in the collective approach to cross-border business transactions in Germany. For the first time, the Administrative Principles describe the required scope of documentation for both the factual context of cross-border transactions and their arm’s length character. In addition, the new provisions related to arm's length documentation emphasize the combination of value chain analysis, internal planning data, and database-driven comparables more than ever before, with severe fines applicable in the absence of sufficient documentation.